Brad DeLong asks (h/t Mark Thoma):

I do have one big question. The US government especially, but other governments as well, have gotten themselves deeply involved in industrial and financial policy during this crisis. They have done this without constructing technocratic institutions like the 1930’s Reconstruction Finance Corporation and the 1990’s RTC, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial guts of the economy to turn out relatively well, without an overwhelming degree of corruption and rent seeking. ... So I wonder: why didn’t the US Congress follow the RFC/RTC model when authorising George W. Bush’s and Barack Obama’s industrial and financial policies?
DeLong had posted a substantially similar version of this column on his blog last week, and I was planning to respond to his question then, but I obviously didn't get around to it. I think it's an interesting question though, so I'll take this chance to offer my response. With regard to TARP, I think Congress didn't set up an RTC-like institution because the feeling was that there simply wasn't enough time. Neither the RTC nor the RFC were set up during market panics. By the time the RTC was set up in 1989, the S&L crisis had been raging for several years, and the 1987 stock market crash had come and gone. Similarly, the RFC was created in January 1932—over 2 years after the stock market crash of '29. Time was of the essence back in September, and in order to respond with the necessary speed and force, more discretion had to be given to the executive branch. The RTC, for example, was run by a board of directors and a separate oversight board. In a crisis, policy-by-committee doesn't work. The market had to be confident that help was coming soon, and wouldn't be held up by internal government bickering (think Sheila Bair). Why wasn't an RTC-like institution created once the financial markets more or less stabilized, and time was no longer of the essence? That's easy: because Congress already gave the executive branch the money. In the administration's view (which I largely share), there's no real benefit from creating a separate "technocratic" institution to administer TARP. Treasury is a highly "technocratic" institution itself, as DeLong no doubt knows, having worked in the Clinton Treasury. I have great confidence in Tim Geithner's competence—in fact, I don't think there's anyone I'd rather have in charge of TARP.


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Anne said...

Back in the dark days of September 2008, Paulson's initial plan for TARP was truly as a Troubled Asset Relief Program - he was going to get the toxic assets off the books. Here's a quote from a September press release he issued:

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible."

We all know the goals changed almost immediately after he issued the press release - but what's the story with the toxic assets?

Are they no longer an issue? Can you address this at some point in a future post?

Milton Recht said...

Probably, it was just a realistic appraisal of the practical problems of liquidating a large commercial bank.

RTC took the assets of liquidated S&Ls. At the time, S&Ls had limited lending authority, no transaction authority (could not open demand deposit accounts), very low amounts of business loans and commercial real estate loans, no international or foreign currency operations. S&Ls also were almost exclusively consumer lenders and retail deposit takers. Many S&Ls also used outside back office processing companies, which could continue to operate and provide info during liquidation.

A current commercial bank is much larger, has many more business functions, many more counter-parties, and handles much more of its operations in house than an S&L of 25-30 years ago. Moreover, the RTC model works best as a liquidation model because there are no issues with accounting write downs in government liquidations.

In all markets where S&Ls were liquidated, very likely an existing commercial banking or S&L operation could take over the consumers needs of the local population.

Imagine a government entity, which requires hiring extra personnel, leasing offices, etc., attempting to liquidate all the operations of a Citibank or Bank of America. It would not be a quick or easy fix for the financial crisis.

Steven Bassion said...

I don't know, but I assume that an RTC like entity was not set up because the RTC was sufficiently recent that some folks in DC and NYC remember what a terrible idea the RTC was.

From my point of view - then - Congress had a great theoretical idea. How it played out (where I was, in Texas) was that the shells of the failed banks were paid to administer their old loans. RTC paid these shells fees for collecting payments, foreclosing, etc. The fee structure created incentives for foreclosure, rather than getting loans to perform . . .making the problem 20 times worse than it would have been.

Six months or a year later, 8/2009, there's lots of opportunity to second guess. Then, those guys said, "Let's not make the same mistake again." So they made other mistakes.

Anonymous said...

First, I was around, Dallas, when the RTC set up shop, and we audited one of their contractors. Gave me a glimpse into the machinery. To say they sold off perfectly good real estate for pennies on the dollar doesn't quite cover it. Try a penny on the dollar, or less. The RTC easily could have made the federal government a trillion, or more. Haste makes waste. It ended up losing somewhere over 100 billion. A brand new 40-story building is never worth 20 million dollars. In RTC world, it was.

Geithenr and Bernanke seem to understand this. Many of these"toxic" assets will recover. Why? Because a large number of them were never toxic in the first place. That's what the "cash for trash" crowd can't quite seem to comprehend.

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